UK real estate market commentary - January 2026
UK real estate enters 2026 with easing inflation, cautious monetary policy and early signs of a capital value recovery, even as occupier demand and broader economic momentum remain subdued.
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Economic backdrop
Economic momentum in the UK slowed in late 2025, with a modest contraction in October. This was driven by a weakening labour market, falling industrial production, cautious consumer and business spending amid persistently high inflation, fiscal and (geo)political uncertainty. Whilst November’s GDP growth surprised on the upside, these uncertainties persist, with the geopolitical situation remaining highly fluid.
Highly anticipated Autumn Budget
Markets paused in advance of the November Autumn Budget, with few of the measures announced judged to bolster economic growth. As expected, the Chancellor’s package included several tax increases to help reduce the fiscal deficit. Much of the fiscal tightening has, however, been pushed out to future years, with the additional headroom designed to achieve a balanced budget in 2029/30. Market pricing for gilts and sterling reacted positively. Despite this, the January Consensus forecast for 2026 annual GDP growth remains unchanged since summer last year at 1.0%, reflecting a deceleration from 1.4% for 2025.
Inflationary pressures ease but policy path remains cautious
Elevated inflation remains a concern with a December Consumer Price Index (CPI) increase of 3.4% following declines in October and November to 3.6% and 3.2% respectively. Underlying inflationary pressures such as energy prices and labour costs are, however, easing. In a narrow call, the Bank of England’s Monetary Policy Committee (MPC) voted in December for a 25bps cut to the bank rate to 3.75%; the first such cut since summer 2025.
The guidance from the Bank remains cautious, stating that “on the basis of the current evidence, (the) Bank Rate is likely to continue a gradual downward path. But judgements around further policy easing will become a closer call.” Much will depend on future inflation and strength of the labour market. At the start of January, markets are expecting a further cut to 3.50% during the spring, with rates stable thereafter for the remainder of 2026.
UK real estate market
Capital value recovery continues
Amid recent uncertainty, the recovery of UK real estate capital values that started in summer 2024 has continued over the last quarter, driven by a combination of modest rental growth and yield compression. All Property capital values recorded in the MSCI UK Monthly Index for December 2025 showed 1.3% annual growth, led by improvements in the industrial (+3.0% year-on-year), residential (+2.2%) and retail (+1.7%) sectors, whilst office values continued to decrease (-2.3%).
This underscores our view that, following a significant correction in capital values of approximately 25% between mid-2022 through mid-2024, a nascent recovery remains underway, notwithstanding momentum during the second half of 2025 weaker than anticipated. We are currently projecting an UK All Property total return of 9-10% for 2026 and 8% p.a. over the next five years through 2030. This is comfortably above the prior 10-year average of 4.3% p.a.
Occupier activity remains largely subdued
On the occupier side, ongoing uncertainties have dampened confidence, resulting in relatively subdued occupier activity and demand. Occupiers remain focused on modern, high-quality space in accessible locations. Elevated construction costs and reduced debt availability in recent years have curtailed development pipelines and the availability of new space. In addition, rising construction costs are pushing up rents to sustain development viability. This imbalance is expected to underpin rental income and provide support for future rental and capital value growth.
Investment activity rebound at year-end
Preliminary data from MSCI RCA indicates that transaction volumes for the final quarter of 2025 reached £19 billion, an improvement of 20% on Q4 2024 and the strongest quarter since mid-2022. Liquidity remains low, however, in historical context with volumes for the full year of 2025 at £48 billion, roughly 15-20% below the 10-year average. With further easing in monetary policy expected and sentiment indicators such as PMA’s index of investor intentions published in December highlighting ongoing positive investor attitudes towards UK commercial real estate, investment activity should improve further.
Investment outlook
Our preferred portfolio positioning has shifted to a more neutral stance across sectors.
Looking forward, we expect asset-specific and location considerations, for example building sustainability profiles, to have a greater influence on relative performance compared with recent years, which saw record sector-level total return divergence.
Industrial and logistics benefit from structural tailwinds
We see value in industrial estates (including outdoor storage facilities), cross-dock warehouses, and urban logistics assets benefitting from positive e-commerce and urbanisation trends. We believe that the turmoil around tariffs and further geopolitical fragmentation is likely to lead occupiers to review supply-chains and accelerate nearshoring activity, particularly for critical and strategic goods. There is a growing threat of obsolescence in the sector with over 50% of UK stock older than 10-years (source: JLL) and many major occupiers having introduced carbon reduction targets. This supports demand for new and refurbished space going forward amidst shrinking future supply. Access to sufficient power, preferably from renewable sources, is also high on occupiers’ agendas, creating scope for owners to generate incremental income from ‘electrifying’ facilities through the provision of onsite charging facilities and power generation. The strong growth in AI continues to fuel the demand for data centres and a need for powered land sites, a sector where investor interest remains strong.
Retail has stabilised
The retail sector has stabilised, with recent valuation data showing a recovery in multiple segments following a decade-long period of adjustment. Whilst we remain cautious of ongoing headwinds to consumer confidence and margin pressures for retailers, elevated income yields on rebased rental levels provide potentially attractive prospective returns. Our preference remains retail parks attracting discount/mid-market retailers, and resilient convenience formats including supermarkets in areas with strong/growing catchments and high footfall.
Offices polarise as ‘best-in-class’ shortage deepens
In the office sector we remain selective, favouring well-located, high-quality offices with sustainability certifications1 in London, major regional centres, and knowledge-driven economies. Many companies, including some major international corporations, have recently reported increased return to the office (voluntarily or mandatory). Despite this, hybrid working arrangements will likely remain a permanent feature. As a result, occupiers are expected to continue to seek high-quality space to attract and retain talent, encourage attendance, and foster collaboration. Modern office space is already scarce across major UK city centres. As such, the imbalance between constrained future supply and rising demand for ‘best-in-class’ is likely to intensify.
Shift towards operational real estate continues
UK real estate portfolio allocations continue to evolve and thus, we are drawn to sectors where operational improvement can unlock alpha and cashflows aligned to inflation through ‘pass through’ effects. These can be delivered both directly and indirectly, with outsized income growth potential aligned to the success of the business activities taking place within the properties. This includes self-storage which is benefitting from the growth in the number of households and e-commerce, as well as representing an attractive consolidation opportunity. Living and ‘social infrastructure2, segments such as medical centres provide long-term resilient cashflows driven by longer-term demographic trends rather than economic cycles.
There remains a sizeable opportunity for private capital to fund the development of affordable and social housing3 formats that can provide contractual inflation-linked income and positive impact attributes. This strategy is set to benefit from strong government policy support.
Secondaries and recapitalisation opportunities
Lastly, the current environment is catalysing compelling recapitalisation and secondaries opportunities across real estate platforms, funds, and other holding entities. These involve providing flexible capital solutions to established management teams facing time or capital constraints in optimising value. Opportunities are being fuelled by favourable cyclical and structural dynamics – particularly the need to address operational complexity and sustainability requirements, and capital value declines of 20-30%+ that have exacerbated balance sheet and asset funding challenges.
1Sustainability certifications are accreditations which assess sustainability credentials of buildings, for example BREEAM.
2In this context only, we are defining social infrastructure as healthcare, employment opportunities, education and training.
3As defined in Annex 2 of the National Planning Policy Framework or any subsequent regulatory definitions, as well as specialist housing, sheltered housing and other forms of housing for residents facing homelessness or other crisis situations, whether regulated or otherwise.
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